Cabinet approves Rs 94 billion viability gap funding for Budhi Gandaki

The government is providing Rs 94 billion as viability gap funding (VGF) – as recommended by the National Planning Commission (NPC) – for the development of the 1,200-MW Budhi Gandaki Hydropower Project with domestic resources.
A cabinet meeting on Friday (February 9) has decided to issue the grant equivalent to around one-third of the project’s estimated cost. The viability gap funding is provided to important infrastructure projects that may not be financially feasible.
The storage-type hydropower project Budhi Gandaki that is located in Dhading and Gorkha districts in central Nepal is estimated to cost $2.6 billion (approximately Rs 270 billion). The construction is expected to take eight years.
According to the spokesperson at the Energy Ministry Dinesh Kumar Ghimire, the cabinet has informed the ministry about the decision. "However, the ministry is yet to receive a formal letter from the Prime Minister’s Office,” he said, adding that the ministry will start the project development process and look for other sources of funding once they receive the formal letter.
The planning commission had started looking for implementation and funding modalities for the construction of the Budhi Gandaki Hydropower Project after the Prime Minister Sher Bahadur Deuba-led government terminated the memorandum of understanding (MoU) signed with China Gezhouba Group Company (CGGC) to build the project under the engineering procurement construction and financing (EPCF) model.
After cancelling the agreement with the Chinese company, Deuba government decided to construct the project by itself through Nepal Electricity Authority (NEA). Subsequently, the government formed a committee led by NPC vice chair Swarnim Wagle to look for financing options to build the power plant.
However, with a new government, the decision seemed to lose its validity as the premier Kp Sharma Oli had publicly criticised Deuba’s decision to scrap the MoU with the Chinese company. Oli had also openly pledged to reinstate the deal after becoming prime minster.
According to the National Planning Commission (NPC) report, the government should provide gap funding covering around one-third of the project’s total development cost. "The NPC submitted the report to former energy minister Kamal Thapa, who took the proposal to the cabinet."
If the project is built through a special purpose vehicle, the government may provide viability gap funding of Rs 94 billion to the developer, according to the NPC report.
According to the report, the funding is needed for land acquisition and resettle locals, who will be displaced by the project. If this amount is deducted from the project cost, the developers will have to invest only Rs 176 billion and it will raise the return on the investment.

Parliamentarians instruct government to construct Budhi Gandaki by itself

Instructing the government to halt the process of allowing China Gezhouba Group Corporation (CGGC) to develop Budhi Gandaki Hydropower Project, the Parliamentarians have asked to construct by itself.
Nearly four months after the government signed a contract agreement for the hydel project with the CGGC, a joint meeting of Agriculture and Water Resources Committee (AWRC) and Finance Committee – under the Legislature Parliament – today has instructed the government to to scrap the Memorandum of Understanding (MoU) to award the 1,200-MW Budhi Gandaki Hydropower Project to the Chinese government undertaking . The MoU was signed in May.
The 1,200-MW project was recently listed as a component of the Belt and Road Initiative (BRI), the China-led plan that envisages greater trade and connectivity and supports varied infrastructure projects.
"The meeting has decided to order the government to scrap the MoU and all the processes of awarding the hydropower project to the Chinese developer and develop it by mobilising internal resources,” chairperson of the Agriculture and Water Resources Committee Mohan Prasad Baral said, adding that the national pride project should be built by mobilising domestic capital and capacity instead of handing it over to a foreign company.
The lawmakers, on the occasion, also flayed the government saying that the project was handed over to the CGGC against the country’s legal premises and breaches the Public Procurement Act. The government has also been criticised for not holding free competition before deciding on the company to undertake the hydroelectricity project.
"This project was handed over to a controversial Chinese company whose track record is so bad in Nepal by flouting various laws like Public Procurement Act," chairperson of the Finance Committee Prakash Jwala said, adding that the government made a blunder by awarding the project to the Chinese firm. "The intention behind selecting this Chinese firm is only to hold the project."
Budhi Gandaki – a reservoir-type mega project that lies in Gorkha and Dhading districts – has been highlighted as a key project to resolve the country’s perennial power crisis.
Kulekhani hydropower projects 1 and 2 – the only reservoir type hydropower plants in the country – having combined capacity of 92 MW are capable of offsetting supply shortage during dry season.
The government-led by Pushpa Kamal Dahal, on May 23, had in principal decided to entrust the work of building the mega project to the CGGC under the engineering, procurement, construction and finance (EPCF) model, though the government led by KP Oli had already completed the home work to award the project to the Chinese developer.
Following the cabinet decision, the then energy minister Janardan Sharma had signed the MoU with president of CGGC Lv Zexiang on June 4 in the presence of then PM Pushpa Kamal Dahal and Chinese ambassador to Nepal Yu Hong. The MoU, however, is silent about project cost. According to the project's DPR prepared by a French consultant, the project is estimated to cost Rs 261 billion.
State Minister for Energy Shambhu Lal Shrestha, on the occasion replying the House committee, said that the country can construct the project with domestic resources.
Though the parliamentary panels have directed the government to scrap the project, they want continuation of land compensation payment. The committees have suggested providing the displaced people a share in the project instead of compensation, for easing the process. The government has listed it as a national pride project. The government has allocated Rs 5.33 billion for project development this fiscal year.

Government decides to award Budhi Gandaki Project to Chinese company

In a key move to strike a balance between China and India – that is developing two major hydro projects Arun III and Upper Karnali – the Cabinet today decided to award the 1200-MW reservoir project Budhi Gandaki hydropower project to a Chinese company.
Minister for Law and Justice Ajay Shankar Nayak, after the cabinet meeting informed that the cabinet had decided to begin the process of awarding the project to China Gezhouba Group Corporation (CGGC), China’s government-owned company.
The government will prepare a guidelines on awarding the project including financing model.
The project will be awarded in engineering, procurement, construction and financing (EPCF) model, - a new model for the country. According to this model, the developer has to bring in financing to build the plant to be built in Budhi Gandaki river in Dhading and Gorkha district. The EPCF model of project development, under which the contracting firm makes all the arrangements including the funds to build the project, is considered to be one of the most effective models for the development of huge infrastructural projects.
Currently, the Finance Ministry is in the process of preparing the guideline for the EPCF model of project development. After it is ready, there will be more clarity on how the model works.
The cabinet meeting also approved the draft memorandum of understanding (MoU) to be signed with CGGC soon. The MoU – according to Energy Minister Janardan Sharma – is a preliminary accord and it will not bind the government legally or financially without entering into a separate agreement. However, the CGGC will also have to come up with a technically and financially viable proposal within a year.
"As per the draft MoU, CGGC will get a year to make an assessment of the hydropower project and arrange funds for its development,” he said adding, "If the Chinese developer comes up with a proposal agreeable to us, we will sign another contract."
A Detailed Project Report (DPR) prepared by a French consultant last year has estimated the project's cost at Rs 261 billion including the cost of land acquisition. Land acquisition is underway after completion of Detailed Project Report (DPR).
The 1200-MW project located in Gorkha and Dadhing districts could be crucial in addressing the country's energy crisis. The previous government led by KP Sharma Oli had also considered CGGC's proposal to develop the project but the proposal was shelved without furnishing any clear reason. And the then Finance Minister Bishnu Poudel had – through the budget – started collecting Rs 5 per litre Infrastructure Tax on petroleum products claiming to construct the reservoir project on Nepali's own investment. The government has already collected Rs 84 million from the consumers in the name of Budhi Gandaki that the government was planning to construct in a company model. The government has also allocated a budget of Rs 5.33 billion – as compensation – in the budget for the current fiscal year. The district administration offices of Dhading and Gorkha – the project affected districts – are currently distributing compensation to the owners of the land required for the construction of the project.
But with the decision to award the reservoir-based project to the Chinese company, the government has put an end to the process of building the plant under the company model.
Considering the massive investment needed for the mega project and its technical complexities, the government chose to award it to the Chinese company, according to the Energy Ministry.
According to Energy Ministry spokesperson Dinesh Kumar Ghimire, the government will enter into a preliminary Memorandum of Understanding (MoU) with the company soon but this agreement will not be legally binding until a project development agreement (PDA) is signed. "The government will enter into an agreement after the MoU."
According to the Energy Ministry, the Chinese government was very keen on having a Chinese company develop the project, and had proposed with Prime Minister Pushpa Kamal Dahal during his recent visit to China. Chinese officials had even pledged to provide a soft loan via the Export Import Bank of China to the Chinese company to build the project, if it is awarded the contract.
The government also expects the CGGC to arrange major financing – at least over 50 per cent of the project cost – in the form of a soft loan because the project is not viable on commercial loans. "If the government is satisfied with its proposals – both technical and financial – the final contract will be signed,” added Ghimire.
According to the plan, a 263-meter high dam will be built in the Budhi Gandaki River, which will form a reservoir about 15 times bigger than the Fewa Lake in Pokhara that will generate 1330-GWh electricity annually and will displace about 45,000 people.
The Chinese company CGGC had started working in Nepal in early 2000s by building the 45-MW Upper Bhotekoshi Hydropower plant.
Currently, the company is working as the civil contractor of at least three hydropower projects – including Chameliya that has suffered a cost overrun of more than double the estimated cost – but its overall performance has been poor and the projects have seen multiple cost variations and time overruns, though not only because of CGGC always.
Likewise the company's proposal to upgrade the Upper Trishuli III project in 2013 had also courted controversy.
Sino Hydro Resources – a Chinese government undertaking – completed the 50-MW Upper Marshyandi A Hydropower Project – the project is the first one to be built with Chinese investment – in September.
Likewise, the government is building the 750 MW West Seti Hydropower Project in the western part of Nepal with joint investment from China Three Gorges Corporation (CTGC), another Chinese government-owned company. The government led by Dr Baburam Bhattarai had awarded the project to CTGC that has 75 per cent stake in the project.

Budhi Gandaki hydropower to start from next fiscal year

The government has committed to allocated budget for the Budhi Gandaki Hydropower Project in the budget for the next fiscal year 2013-14.
The government has recognised Budhi Gandaki as one of the projects of national pride, said secretary at the Prime Minister’s Office Krishna Hari Baskota, here today.

The 600 MW hydropower project to be constructed along the border side of Dhading and Gorkha districts, will help end load shedding in the country, he said, adding that the construction cost of the project is also comparatively lower.
He also informed that the project would be developed soon once the French company Tractebel Engineering SA submits its reports on feasibility study, DPR and tender. “The project is expected to complete by 2022.”
Likewise, chairman of Budhi Gandaki Hydropower Proejct Development Committee Dr Laxmi Prasad Devkota said that it would be completed within eight years if the existing legal provisions were cut short.

Former minister Gangalal Tuladhar, on the occasion, said the project would be one of the examples in the country.
Budhi Gandaki Hydropower Project – a storage type project on the Budhi Gandaki River – was identified during the Gandaki Basin Study in late 70's. In 1984, a pre feasibility study of the project was prepared. The pre feasibility study of the project has recommended 600 MW capacity plant with FSL 520 masl.